To buy or to sell?

One of the more interesting articles that I’ve read recently is one written by Jeffrey Saut, entitled “What time is it?!”. He started the article by quoting a passage from Adam Smith’s book entitled “Supermoney”.

“We are all at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know, by the rules, that at some moment the Black Horsemen will come shattering through the great terrace doors, wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid no one wants to leave while there is still time, so that everyone keeps asking, ``What time is it? What time is it?’’ but none of the clocks have hands.”

The article which deals with the ongoing market correction & I would recommend that you read it in its entirety (go here). I like to quote one passage from that article, which deals with the expected technical rebound & what to expect from this rebound. To wit:

“…we would expect some kind of throwback rally attempt today (last Wednesday). Regrettably, we think that rally attempt will fail, leading to a series of bottoming attempts at best as the markets attempt convulses, or at worst they take-out Tuesday’s lows and extend the correction.”

To be more specific, Jeffrey expects the throwback rally to last for “three- to five-session” to be followed by a pullback. The pullback “is when it will become more apparent if this is something more than just a 5% - 8% correction”. What's more than a 5%-8% correction? A bear market!

When you look through the charts of all the global equity markets (go here for the US markets & here for all the other global markets), you would see that they have all rebounded strongly (or, underwent some kind of throwback rally), but most of them are still below their immediate uptrend line. The next few days will be very critical. Are these markets going higher & returning to their prior uptrend line? Or, are they going to pullback & re-test their recent low & then recovering from this low? Or, are they going lower than their recent low?

For our KLCI, you will note that it has one of the sharpest correction when compared to other global market, whereby the index gave back 190 points when it retraced from the high of 1280 to its low of 1090. The 190-point decline represents a 66%-retracement of its prior advance from its breakout point of 990 level. You may recall that in any rally, the market can undergo a correction ranging from 33% to 66%. Anything more than 66% would raise serious doubt whether the market can return to its prior trend. So, our recent sharp correction still fall within the range of acceptable correction.

The other thing to note is that the KLCI has managed to climb above the previous uptrend line that was violated during the sharp correction. This operative uptrend line could now provide support for the KLCI in the event of any correction. That support would be at the 1150 level.

From Chart 1 below, we can see that the immediate resistance for the KLCI is at the 1215/20 level. If it can surpass this level, the next resistance will be at the 1250 level & thereafter the 1280 level (the KLCI's recent high).

If the KLCI were to do a pullback, then it may re-test the immediate uptrend line at the 1150 level, followed by the strong psychological support of the 1100 level, the recent low of 1090 and finally the medium-term uptrend line at the 1075/80 level.

Chart 1: KLCI's daily chart as at Mar 9

As noted before, I believe that most of the other equity markets are in a precarious technical position. Our KLCI is in a better technical position than many markets. We cannot however take comfort in that fine distinction because if the other markets were to go into a bear market, it is hard to see how our market can be spared. One less bearish scenario that may work in our favor would be if the other equity markets were to consolidate in a sideway manner, our KLCI could be spared. Even if the KLCI were to move in a similar sideway manner, I foresee that the second- & third-liners can still move upward, selectively. In fact, I believe that one sector that is already showing some potential is the Mesdaq stocks. From Chart 2 below, you can see that Mesdaq is in a very gradual uptrend. It was rallying up strongly prior to its recent correction and it has picked up pace again, yesterday.

Chart 2: Mesdaq's daily chart as at Mar 12

I've posted this without answering the question "To buy or to sell?". The general answer is to sell-on-strength (like now, with the KLCI at or above the 1200 level) and buy-on-weakness (when the KLCI pull back to the 1150 level or lower). This recommendation should apply for the next few weeks until we can see a clearer market direction going forward.